Implications of Beneficial Ownership Distinctions for Shareowner Communications and Voting

by  Alan L. Beller and Janet L. Fisher, for The Harvard Law School Forum at Harvard Law School, March 18, 2010.

A shareowner’s right to vote on matters as allowed under state or federal law, stock exchange rules or otherwise is a key right. Shareowner voting has also become an increasingly important element in the consideration of public company corporate governance. Recent developments have spotlighted the nature and quality of the communication process and its impact on shareowner voting and governance. These developments include adoption by a number of public companies, especially larger companies, of majority voting in uncontested director elections, the amendment of New York Stock Exchange (NYSE) Rule 452 to prohibit broker discretionary voting in uncontested director elections and the increased influence of activist shareowners and proxy advisory firms. The confluence of these developments has heightened the likelihood of more meaningful, and contested, shareowner votes and elevated the importance of shareowner communications in the context of voting and governance.

Issues of shareowner voting and communications depend on both state and federal law. State law focuses on record ownership (i.e., the holder shown on a company’s books, whether or not the ultimate shareowner) because of administrative ease and certainty. Federal law, on the other hand, emphasizes regulation of communications by public companies for shareowner meetings and other matters, as federal regulators are more concerned with the interests of beneficial owners (i.e., the ultimate owners) in voting and receiving related disclosure. The record owner may also be the beneficial owner of the shares, but for shares held with financial institutions, the link between record and beneficial owners is not simple. A complex chain of intermediaries often separates the record owner from the beneficial owner. Companies typically do not know the identities of all beneficial owners of their shares, nor do beneficial owners know the identities of other beneficial owners generally. The information resides largely with the intermediaries. This information disconnect limits the ability of companies to communicate with their beneficial owners and of beneficial owners to communicate directly with each other…(continue reading)

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